Sephiroth is a good villain, but in my opinion, not the best.
He have the looks, the music, cool powers, and the mystic(he was misteryous) going for him.
But he was not the best one, because he don't have everything that make a villain be a good villain.
He don't have almost any personality(he is evil, arrogant, and that's all), don't have ANY reason to do what he did(after gaining the knowledge of the Lifestream, he knew that he was not a Cetra. But he want to become a God anyway, just because he want more power), and don't have any cool, memorable quotes.
I think that his look, the music, the mistery, and the fear that everyone feel for him in the game, create an atmosphere around him, that make him cool. And this is why me and many other people like him. But if you remove all of this, and only look to the character itself, you will see that he is not that great.
Ah, and he have the nostalgic feeling going for him too(he was the first RPG villain for MANY people).

This is my opinion.